Tax land, not buildings, to help cities thrive

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In 1879, during an earlier age of inequality, the reformer Henry George proposed a radical solution — “to abolish all taxes — except on land values.” By following George’s lead and
calling for a tax on vacant land, New York Mayor Bill de Blasio has revived interest in the idea among progressives nationwide. George vastly oversold his proposal, insisting that “the simple plan of taxation I propose would equalize the distribution of wealth, preventing waste and increasing productivity.” But he was right that taxing land more and buildings less would encourage the construction that many cities — including Boston — need to become more affordable and more inclusive.

Property taxes today generally consider both land and the buildings on them. But George understood something important: that taxing buildings to some degree discourages new building. Under a land tax, in contrast, a developer pays the same amount if the land is used for a parking lot, a single-family house, or a soaring skyscraper.

De Blasio’s proposal tacks a revenue-raising vacant land tax onto New York’s already byzantine real estate tax system. This proposal penalizes landowners who sit on empty parcels. That’s a plus. Maybe a vacant land tax might have pushed Vornado Realty Trust into developing Downtown Crossing rather than letting its property there sit fallow for years.

The real estate bust temporarily eased the urgent sense that Greater Boston’s high housing prices penalized ordinary families and repelled young talent. Between September 2005 and March 2009, the Case-Shiller real estate price index for Boston fell by 20 percent. But the index has risen 16 percent since then. While the recovery helps homeowners, it hurts renters and anyone looking to move into the area. If you hope that our region can retain a greater share of its recent college graduates, then you must also hope for an increased supply of less expensive housing. If new development imposes specific new costs on the community — through, say, increased strain on public sewers — it is reasonable to charge for those costs. But when a project would bring more benefit to a community than a vacant lot does, communities should be careful not to discourage it.

Different communities benefit in their own way from new building. At an event Saturday, I heard Lawrence’s promising new mayor, Dan Rivera, make an argument in support of the judicious use of the state’s tax increment financing program. While Rivera is, with good reason, focused most on improving public safety, he also sees the folly of punishing those who would rebuild his city.

A de Blasio-style land tax wouldn’t do much for Lawrence, because land values are just too low. But there are multiple ways to create the right incentives to build. Under a tax increment financing plan, or TIF, cities charge their full tax rate on the value of the land but give developers an exemption, generally for a defined period of time, for the additional value created by development.

Adjusting the tax system to encourage more construction need not be either a tax break for developers or an attack on the real estate industry.
The current tax code could be tweaked to make TIF tax relief automatic for 50 percent of the value of new developments during the first years of any new project. This reduction could be offset with a tax on underdeveloped land in places — such as Boston — where demand for space is particularly strong. Making TIF relief automatic would also eliminate the possibility of tax breaks flowing to favored builders.

For the tax change to be successful, the permitting process must also allow more building. The lengthy process of community debate needs speeding up. By combining a brisk approval process with a tax policy that encourages more building and penalizes underdevelopment, cities such as Lawrence can promote their own reconstruction — and pricey cities such as Boston can become less expensive and less exclusive.

Edward L. Glaeser, a Harvard economist, is director of the Rappaport Institute for Greater Boston.

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